As the current economic downturn continues to ripple through every sector of the economy, state governments from North Carolina to California are struggling to develop innovative tax policies to boost their plummeting revenues. Traditional methods of taxation are no longer sufficient to satisfy state expenditures—either government spending must change drastically or legislatures must approve new taxes to bolster falling revenues. The recent “Amazon tax” passed by the New York State Assembly is a prime example of the latter. The tax requires out-of-state retailers—such as Amazon.com, Inc. and Overstock.com, Inc.—to collect a use tax from in-state consumers if the retailers have marketing affiliates in the state which produce at least $10,000 in sales. In Quill Corp. v. North Dakota, however, the United States Supreme Court held that, under the Commerce Clause of the U.S. Constitution, a state cannot require an out-of-state retailer to collect and remit a use tax unless the retailer has a “substantial nexus” with the taxing state. The Court invalidated a sales tax imposed by North Dakota on an out-of-state mail-order retailer, which had no offices or employees in the state. By invalidating this tax, the Court reaffirmed the bright-line rule of National Bellas Hess, Inc. v. Department of Revenue of Illinois that “a vendor whose only contacts with the taxing State are by mail or common carrier lacks the ‘substantial nexus’ required by the Commerce Clause;” in other words, some physical presence is required. Attempts by New York and other states to create statutorily this “substantial nexus” between out-of-state Internet retailers and the taxing state through the retailers’ marketing affiliates run afoul of Quill and its bright-line rule.

This Recent Development analyzes the recent New York County Civil Supreme Court decision, Amazon.com v. New York State Department of Taxation & Finance, which upholds the constitutionality of the tax. The focus is on Amazon’s Dormant Commerce Clause argument and the trial court’s application of the Supreme Court’s decision in Quill. This Recent Development argues that the New York trial court failed to apply Quill’s “substantial nexus” test properly and exaggerated the role of Amazon’s associates. As a result, the trial court incorrectly held that the tax on Amazon did not violate the Commerce Clause. When applied correctly, the Quill decision should invalidate New York’s tax on Amazon and similar out-of-state Internet retailers.